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commercial real estate

Manulife Financial headquarters in Toronto.Galit Rodan/The Globe and Mail

Manulife Financial Corp.'s massive real estate arm is expanding in Western Canada – and increasingly choosing to develop towers rather than buy them.

The insurance company, whose real estate portfolio amounted to more than $8.5-billion at the end of 2012, is set to announce next week that it will develop a 27-storey office tower in downtown Calgary, bringing its portfolio in the city to about 1.3 million square feet.

The lead tenant will be Brion Energy (previously called Dover Operating Corp.), a three-year-old Calgary-based joint venture between Athabasca Oil Corp. and PetroChina Company Ltd. that operates two leases in the oil sands near Fort McMurray.

"We want to make a greater allocation to Western Canada. We strongly believe in the fundamentals there and we think that the eastern markets are very crowded right now," said Ted Wilcocks, global head of asset management at Manulife Real Estate.

Manulife announced this week that it has begun construction on 980 Howe St., a 16-storey Vancouver tower that many thought would not go ahead, given the city's building boom. But Manulife managed to secure engineering and consulting firm BGC as a lead tenant.

The Calgary tower, which will be 564,00 square feet, will sit on land that Manulife already owns, and replace a 41-year-old 88,000-square foot office building (as well as a former restaurant and retail site and a parkade).

The two new towers are part of an uptick in the amount of development Manulife is doing. In April, it paid $588-million for a 21-storey office tower in Hong Kong that is still being built and will become Manulife's local headquarters in 2016.

The projects will double, to 10 per cent, the proportion of Manulife's real estate holdings devoted to development.

"The pendulum has finally swung to where it's more accretive to really develop than it is to buy existing stock," Mr. Wilcocks said. "You buy a 25- or 30-year-old building for virtually more than you can currently build a new building."

Prices for office towers are so high now that industry players are questioning whether many markets have peaked.

Manulife had a large development department until the early 1990s and built properties in many Canadian cities as well as Washington, D.C., Los Angeles and Chicago. For a period beginning in the late 1990s, the market dynamics were such that real estate players were making more money buying existing buildings than developing, Mr. Wilcocks noted.

Low interest rates and the rise of real estate investment trusts helped fuel a spike in demand for buildings in recent years, driving up prices.

"It's been a very long run, and now people are looking at the threat of looming interest rates, and that really will change the entire landscape," Mr. Wilcocks said. "A lot of investors are pausing in terms of investing new capital at these levels."

Government bond yields began rising in early May, and that increase in long-term interest rates took a bite out of the market value of the real estate investment trust sector. Rising rates mean that REITs will have higher mortgage costs in the future, and also increase the selection of yield-producing securities that investors can choose from.

"You used to bid on things and have five to seven REITs at the table, and now that number's greatly reduced," Mr. Wilcocks said.